Spring Budget 2016 – Essential Tax Update for Non-doms

It is expected that a Chancellor will take the opportunity to use the Budget to throw sweeteners at the electorate. This year the Chancellor did that literally with the announcement of a Sugar Levy.

Headlines

Corporation tax is getting a revamp with the restrictions being imposed on deductibility of interest, an increase in the loans to participator charge from 25% to 32.5% and a further decrease in corporation tax rates from 20% to 17% by 2020.

From 6th April 2017 capital gains tax will be applied at 20% (10% for basic rate taxpayers) on the gains on disposal of all assets except carried interest and residential property which will continue to be taxed at the existing rates.

From 6th April 2017, the basic rate income tax band will widen by £1,500 to £33,500, allowing the taxpayer to receive more income at the 20% tax rate. The personal allowance is also set to increase from £11,000 to £11,500 for those who are able to retain it.

From 17th March 2016 stamp duty land tax will be applied on the purchase of commercial property at 0% on property valued under £150,000, 2% on property valued between £150,000 and £250,000 and thereafter at 5%. The Government has also confirmed that from 1 April 2016 stamp duty land tax will be applied at 3% extra, i.e. between 3% and 15%, on the acquisition of additional residential properties such as a second home or buy-to-let property. There will be no exemptions for companies or larger investors.

Class 2 national insurance contributions, a tax in all but name, will be abolished from 2018.

Foreign Domiciliaries

Last year’s Summer Budget announced that non-UK domiciled individuals, or ‘non-doms’, who have been resident in the UK for 15 out of the past 20 tax years will become deemed UK domiciled, or ‘deemed-doms’, for all taxes after 5th April 2017. From this date they will be taxable on their worldwide income and gains as the ‘remittance basis’ will be unavailable and their worldwide estate will be subject to inheritance tax. In addition, ‘boomerang non-doms’ (people who were born in the UK with a UK domicile of origin who subsequently obtain a foreign domicile of choice and then later become UK tax resident) will become deemed UK domiciled whilst they are tax resident in the UK.

The Government has confirmed again that deemed-doms (with the exception of boomerang non-doms) will not be subject to UK tax on the income and gains in an offshore trust established before they become deemed-doms.

We were expecting to see draft legislation but it is now beyond doubt that we will not see this until Finance Bill 2017. There will be changes to the mixed fund rules, presumably with regard to income and gains arising as a non-dom as opposed to a deemed dom, to determine how remittances to the UK are taxed.In a further surprise the Government has confirmed that deemed-doms can treat the base cost of their personally held foreign assets as the market value of the asset at 6th April 2017 for capital gains tax purposes. Therefore only the gains arising and accruing after this date will be taxable.

Property

In addition to the changes in stamp duty land tax the Chancellor announced that the Government will be implementing new legislation to tax the profits arising to non-residents derived from the trading in or development of UK land and property. Detailed legislation will be introduced to remove the territorial restriction on the application of UK corporation tax with effect from the Report Stage of Finance Bill 2016 (expected to be June 2016).

These rules will be specifically aimed at offshore companies or structures that derived profits from UK land and property but presently are not subject to UK corporation tax on those profits because there is no permanent establishment in the UK. Where companies undertake part of their trade in UK land or property, and part in other activities, then only those profits relating to the UK land and property transactions will be subject to the extension of corporation tax.

Furthermore, the Government intends to tax the profit on disposal of shares in an offshore structure whose value is mainly derived from the development of UK immoveable property.

Typical tax planning for clients looking to develop UK land and property was to set up an offshore company in Jersey, Guernsey or the Isle of Man in order to take advantage of the provisions of the Double Tax Treaties in place between these jurisdictions and the UK. Typically these treaties prevented certain land and development profits from being taxed in the UK providing the offshore company did not create a permanent establishment in the UK. However, the Government has announced that these treaties have been amended with immediate effect, with the intention of ensuring that profits arising from UK land and development profits may be taxable in the UK. Offshore service providers may find solace by re-domiciling their Guernsey, Jersey or Isle of Man companies in alternative jurisdictions where Double Tax Treaties are unchanged.

As part of this focus HMRC are creating a new team that will focus on offshore property developers to ensure their compliance.

In summary, it is intended that profits on the disposal of a development of residential or commercial property will be subject to UK corporation tax.

Capital gains on the sale of residential property held by offshore structures are already taxable as they are subject either to ATED related capital gains tax or non-resident capital gains tax.

However, the capital gain on the sale of an investment in commercial property by an offshore structure is still free from corporation tax or capital gains tax, so we would expect to see a shift in investment plans by offshore investors.

These changes represent a major overhaul in how the UK seeks to tax UK land and property transactions undertaken by non-residents and we would highly recommend that advice is sought now by those clients who may be affected by these changes.

UK businesses as part of international groups

As part of the UK’s implementation of the OECD “Base Erosion and Profit Shifting” rules, the Government is proposing to enact an “Anti-Hybrid Rule” which will apply to payments made on or after 1 January 2017. Anti-Hybrid rules are complex, but are based on the premise that a tax mismatch can occur on cross border payments made between countries with different tax rates.

These rules will apply where cross border payments result in a “double deduction” (i.e. a deduction from taxable income in two countries) or where a deduction does not lead to a corresponding increase in the taxable profits of another company. Typically “Hybrid arrangements” will be created via the use of sophisticated financial instruments; however the new legislation can also catch more straight forward scenarios such as dual resident companies. Where companies make arrangements that fall within these circumstances, new rules will allow HMRC to disallow any reductions in UK profits or, as the case may be, to add any non-taxable receipts to the profits of a UK company.

Typically hybrid arrangements aren’t created accidentally and so it is likely that companies that could be affected by these rules will be aware of their potential impact. In any case we recommend clients to speak to us if they have any concerns about the possible consequences of these changes.

As a further implementation of Base Erosion Profit Shifting, the Chancellor announced his intention to cap the amount of interest relief for UK companies to 30% of their taxable earnings in the UK, or based on the net interest to earnings ratio for the worldwide group. This announcement is targeted at multinational groups of companies and whilst little detail has been released today, the Chancellor has indicated that a net interest expenses threshold of £2 million will be applied.

Finally, the UK will also be amending its legislation on transfer pricing to bring the UK into line with latest revisions to the OECD’s Guidelines published in 2015. This measure shouldn’t be considered to be a policy change, more of an update of existing law and principles.

Employee Benefit Trusts and disguised remuneration

Beneficiaries of EBTs and other structures caught by the so called disguised remuneration regime can expect further tax complications with a double whammy declared today.

Firstly, it has been announced that the investment growth within the EBT, in addition to the original contribution, will be taxable where a relevant step is taken under part 7A ITEPA 2013, and therefore subject to employee’s and employer’s national insurance as well as income tax.

Secondly, the Government intends to enact provisions in Finance Bill 2016 to impose a new tax charge on loans paid through disguised remunerations schemes which have not been taxed yet, presumably because they were made prior to the 9 December 2010, and are still outstanding on 5th April 2019.

Royalties paid offshore by UK residents

New rules will be introduced to counteract tax avoidance arrangements, including those commonly used by international groups, which avoid the deduction of UK income tax at source (known as a “withholding tax”) on royalty payments.

Non-residents are generally subject to UK tax on royalties arising in the UK. However, the UK has Double Taxation Agreements with numerous countries stipulating that royalties are only taxable in the country of residence of the beneficial owner.

The announced reforms are designed to prevent arrangements whereby royalties are extracted from the UK to a second country tax-free and then ultimately paid to a “connected” group company based in a third country (with no Double Tax Treaty in place with the UK) where no local tax is paid and no substantive activity takes place.

The key aspects of these measures are as follows:

Denying treaty relief from UK withholding tax on royalties paid to a connected party, where an arrangement exists to secure treaty benefits in a manner contrary to the “object and purpose” of the treaty to avoid double taxation;

Widening the definition of “royalties” in the UK’s domestic tax legislation to align it with the OECD’s accepted definition; and

Providing that royalties will automatically be a UK source if they are connected to a UK permanent establishment.

The “denial of relief” provisions will apply to royalty payments made under tax avoidance arrangements from 17 March 2016. The remaining provisions will be introduced in the Finance Bill 2016.

These changes are likely to impact on some of the recent highly publicised tax planning arrangements used by large international groups (try looking the arrangements up on Google).

They will also target the use of “conduit” companies in a jurisdiction in order to obtain treaty benefits, commonly known as ‘treaty shopping’ and situations where intellectual property, such as image rights, is transferred from the UK to a jurisdiction with a favourable treaty with the UK and then exploited.

Tax avoidance and evasion

Although the Budget reconfirmed the Government’s commitment to tackling tax avoidance no additional details were provided. However, it did indicate that in tackling marketed tax avoidance schemes it is likely that the Government will need to clarify certain aspects, for example what constitutes reasonable care in avoidance penalty cases. This will be important for taxpayers as the consequences of not being able to rely on reasonable care in such cases could be either a severe penalty or even a criminal offence.

There was also the scattering of various Targeted Anti-Avoidance Rules (“TAARs”) designed to secure the policy objective and counteract the ‘sophisticated planning’ that is often used to navigate through or minimise the impact of a proposed change in law. For example there is a TAAR in relation to Trading in and Developing UK Land which comes into effect from today and therefore it is recommended that clients seek advice if any of the new legislation affects the offshore structures in which they hold an interest.

Contact Us

If you would like to discuss any tax matter raised within the Budget please let us know.

This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.